Beware sole and exclusive remedies clauses when seeking to terminate a contract

The recent case of James Kemball Ltd v. "K" Line (Europe) Ltd [2022] EWHC 2239 (Comm) serves as a useful reminder to give careful consideration to the effect of so-called “sole and exclusive remedies” clauses contained in contracts before purporting to terminate them.

The background

The salient facts of the case are that the claimant and defendant entered into a services agreement under which the defendant (whose business involved shipping goods to and from ports all around the world, including in the UK) committed to providing the claimant (a company that transported shipping containers by road to and from UK ports) with a guaranteed minimum number of orders.

Some time into the term of the services agreement, three Japanese shipping corporations (including the defendant) merged, and their individual container shipping businesses were consolidated and operated by a new joint venture company.

Because of the merger, the defendant discontinued its UK container business, and it accordingly advised the claimant that:

• The defendant would no longer be able to fulfil its minimum ordering responsibilities under the services agreement.
• It intended, however, to abide by clause 3.3 of the services agreement, which allowed the claimant, as its sole and exclusive remedy, to charge the defendant a surcharge to the extent that the defendant was unable to provide the claimant with enough orders to fulfil the guaranteed minimum.

On receipt of such information (and after further discussion in relation to it), the claimant purported to terminate the contract pursuant to a contractual provision (clause 11.3(a)) that provided that either party may terminate the services agreement if the other party:

“commits a wilful, persistent or material breach of any provision of the Agreement, and if the breach is capable of remedy, fails to remedy it within 30 days after being given written notice of the breach and requiring it to be remedied.”

The defendant claimed that the claimant did not have the right to terminate the contract pursuant to such provision, and that it had accordingly repudiated the contract.

The judgment

Repudiation

As the claimant did not purport to terminate at common law or under any other provision of the contract (other than clause 11.3(a)), the claimant had to show it had grounds to terminate under clause 11.3(a).

The Court compared the usage of the word "commits" in clause 11.3(a) to "threatens to cease" in a later clause, concluding that the difference in wording between the two provisions revealed that the parties had intended that the right to terminate in that later clause applied to prospective rather than current or past behaviour.

Conversely, a correct construction of clause 11.3(a) was that it could only be triggered if a breach had already occurred when the termination notice was sent.

The court found that, when the claimant issued the termination notice to the defendant, there had been no wilful, persistent, or material failure (within the meaning of clause 11.3(a)) by the defendant in relation to the surcharge clause (clause 3.3). In fact, the defendant had stated unequivocally that it planned to abide by clause 3.3.

The Court noted that the claimant might have relied on other rights to terminate by sending a termination notice that invoked other clauses of the contract in the alternative, but that it had failed to do so.

Sole and exclusive remedy

The Court then turned its attention to a contractual provision under which the parties had agreed that the claimant’s sole and exclusive remedy for the defendant’s failure to place a guaranteed minimum number of orders would be to levy a surcharge under clause 3.3.

The “sole and exclusive remedy” provision, the Court held, rendered termination by the claimant impossible in any case. This was because:

• The services agreement had been professionally drafted and signed by both parties, both being represented at the time by lawyers.
• The parties were well within their rights to address each risk differently. Having agreed to a particular approach to the risk of less than a guaranteed minimum number of orders being placed, they should be held to their bargain.
• Even if the claimant believed that the sole and exclusive remedy provided for under clause 3.3 was inadequate, it was not the function of a court, when construing a contract, to relieve a party from what that party perceived to be a bad bargain (or to have become one over time) by hunting for drafting ambiguities that in reality do not exist.
• The parties had, in clear and unambiguous terms, chosen to manage the risk that the defendant would not place the guaranteed minimum number of orders by a contractual compensation mechanism. There was no basis for ignoring the phrase “… sole and exclusive remedy …” or for concluding that it should not take effect in accordance with its terms.

Observations

A party looking to terminate a contract must ensure that the factual matrix actually supports termination under the contractual provision it chooses to rely on. This is especially important when there might be several grounds for termination and/or a choice of contractual termination provisions and a right to terminate at law. Termination is not something embarked upon lightly, and requires appropriate legal advice.

Where the parties agree a specific approach to risk allocation at the time of contracting, in the absence of other factors an English court is likely to hold the parties to their bargain. A party should be cautious if being asked to surrender rights (such as the right to terminate at law, or to seek damages, for example). While the English courts typically jealously guard rights at common law, and will not lightly hold that a party has given up such rights, they will do so in appropriate cases where the wording is clear that that is what the parties have intended.